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INTERVIEW-Brazil's 'problematic' low growth a threat in the long run - S&P

COSTA DO SAUIPE, Brazil, March 28 (Reuters) - Brazil's credit rating could come under pressure again if its economy continues to grow at a slow pace during the next five years or so, analysts with Standard & Poor's said after the ratings agency downgraded the country to near junk status this week.

Although S&P has stressed that Brazil's investment grade is not at risk for now, the analysts warned about declining expectations for growth in Latin America's largest economy.

"It's impressive how the consensus about trend growth in Brazil is coming down slowly and nobody realizes how problematic that is," S&P analyst Sebastian Briozzo told Reuters on the sidelines of a meeting hosted by the Inter-American Development Bank in a resort 47 miles (75 km) north of Salvador.

"If you grow at 2 percent for five years, let's see how sustainable that is."

Brazil's potential growth, or the rate at which its economy is able to expand without stoking inflation, was believed to be running at more than 4 percent just four years ago. Now, many economists estimate it is under 3 percent.

Slower growth "makes everything more difficult" as it eats into government revenues, reducing the room for policies to stimulate the economy or react to shocks, Briozzo said. In the case of Brazil, large fixed expenses related to debt, wages, and pension payments add to the problem.

"Lack of flexibility is crucial for us. We don't see prospects for it to get better," said Briozzo, citing one of the key reasons why S&P decided to cut the country's credit rating to BBB-minus earlier this week.

While he said the fiscal side was clearly the "weak link" in Brazil, S&P also based its decision on "mixed policy signals" from the government on how to improve its fiscal performance ahead of October's presidential elections.

A SLOW, LONG SHIP

In the long run, Brazil's growth prospects will depend on meaningful tax and pension reforms that S&P considers unlikely to happen in the medium term, Briozzo said.

"You have to debate those reforms for three years and the discussion is not there," he said.

He recalled a metaphor S&P has used since it was about to upgrade Brazil to investment grade in 2008: Brazil is a long ship which, for better or worse, moves very slowly because its developed political institutions provide checks and balances to any government.

In 2008, S&P used to describe Brazil as a "ship slowly moving in the right direction." Now, the firm's analysts stop just short of saying the boat has made a wrong turn.

"It is still investment grade," said S&P's analyst Jane Eddy, noting the stable outlook assigned to Brazil's rating.

She said, however, that disappointment over Brazil's economic growth, which averaged less than 2 percent during the past three years despite a raft of government stimulus, was a turning point for S&P's analysis of the country's rating.

(Reporting by Walter Brandimarte; Editing by Tom Brown)